Indian Clearing System – Introduction of new Return Reason 88

            With the adoption of Uniform Holiday Calendar under Cheque Truncation System (CTS), a new Return Reason has been introduced.

Under CTS, inward clearing is generally processed in a centralised manner by banks at the CTS location.

However, in exceptional cases, where the reference to base branch is required and the base branch is closed on account of local holiday, the drawee bank at the grid location may return the instrument to the presenting bank under return reason code 88 as enumerated in annexure D of Uniform Regulations and Rules for Bankers' Clearing Houses with the description “need reference to the drawee branch which is closed on account of local holidays/issues”.

Return Reason 88 will be a technical return reason, and will have to re-present by the Presenting Bank, without the physical cheque being returned to the customers.

Drawee Banks have to be very careful while choosing this return reason as the onus will be on them, to prove that there was a holiday in the Base Branch state, in case of any dispute.

Cheque Truncation System in India - slowly spreading its wings

The benefits of CTS are not yet visible to the general public. Once the Southern Grid is fully operationalized, the change will be clearly noticeable.

As per RBI FAQ’s on CTS, the new approach is the Grid Based approach, wherein the whole country will be divided into Grids.

As a beginning, Chennai Grid has been operationalized in March 12, with few banks of Bangalore and Coimbatore joining it. Like all good things in life, it will be a while, before all Bangalore/Coimbatore Bank branches are on the CTS Grid.

Eventually, the Chennai Grid will cover Bank Branches in Tamil Nadu, Kerala, Karnataka, Andhra Pradesh and the Union Territory of Puducherry.

In my view, the major benefit of CTS will be enhancement of the coverage of the Speed Clearing.

Let me explain in detail.

The below table contains list of few Co-operative with exclusive presence in Tamil Nadu or in Coimbatore/Chennai cities.

Sample List of Co-operative Banks
COIMBATORE CITY COOP.BANK LTD	Coimbatore
COIMBATORE DIST.CENTRAL COOP.BANK LTD	Coimbatore
COIMBATORE DIST.CENTRAL COOP.BANK LTD METTUPALAYAM	Coimbatore
METTUPALAYAM COOP.URBAN BANK LTD	Coimbatore
PALLAVAN GRAMA BANK LTD	Coimbatore
POLLACHI COOP.URBAN BANK LTD	Coimbatore
TAMILNADU INDUSTRIAL COOPERATIVE BANK LTD.	Coimbatore
CHENNAI CENTRAL CO-OP. BANK LTD.	Chennai
GEORGE TOWN CO-OPERATIVE BANK LTD.(GTC)	Chennai
TAMILNADU INDUSTRIAL COOPERATIVE BANK LTD.	Chennai
TAMILNADU MERCANTILE BANK LTD.	Chennai
TAMILNADU STATE APEX CO-OP. BK. LTD.	Chennai

Suppose a Bangalore based customer-(holding account with ABC Bank) receives a cheque drawn on COIMBATORE CITY COOP.BANK LTD

Sr.No	The Present	The Future
01)	Customer deposits it in ABC Bank Branch	No Change
02)	ABC Bank branch forwards it to their Bangalore Service Branch	No Change
03)	ABC Bangalore service branch, forwards cheque to their Coimbatore service branch	Change	Cheque is lodged under CTS Grid Clearing. The image is transmitted to COIMBATORE CITY COOP.BANK LTD branch
04)	ABC Coimbatore service branch presents in local clearing	Change	This step is eliminated
05)	Status - If ‘return’, the physical cheque is sent back to ABC Bangalore service branch.	Change	This step is eliminated
06)	Status - If ‘no return’, amount is credited to the customers account.	No Change

The Benefits:

1. Reduction in TAT for credit to the customer.
2. Enhancement of Scope of Speed Clearing i.e., Co-operative Banks/RRB’s/LAB’s/ Other Banks still not part of Speed Clearing
3. Increase of volumes processed under CTS.
4. Boost for financial inclusion, as citizens residing in remote/small places with access only to Co-op Banks/RRB’s can also get the benefits of faster realization of cheques.

Streamlining of few areas:

Paper to Follow – The less the ‘paper to follow’, requests, the more will the efficiency of the CTS will increase.

1. One recent Finance Ministry Notification should reduce the ‘paper to follow’, instruments to Government Departments i.e Controller General of Accounts (CGA) directed all payments above Rs 25,000 to suppliers, contractors, grantee and loan institutions to be directly credited to their bank accounts. This is with effect from 01/04/2012.
2. As the participants gain experience of the CTS environment IQA Failure cases would go down.

Bank Holidays under NI Act:

Regional Holiday and Blockage

The Grid Jurisdiction will fall under different states, and the states have different holidays calendars.

The CTS Application has a “Blockage” function in the system to handle different state holidays, for a ‘value date’. The blockage prevents other banks to present any cheques on the branch / bank put under blockage.

In addition, it gives extension to all unexpired items drawn on such branches and banks for the blockage period.

The branches / banks under blockage can not lodge any fresh presentation during the blockage period.

New Returns Reasons under Cheque Truncation System (CTS)

Reason No                  Reason Description

82                               Bank/ Branch blocked

83                               Digital Certificate Validation failure

92                               Bank Excluded

5 significant features of Cheque Truncation System - Chennai

5 significant features of Cheque Truncation System - Chennai

RBI  in its Second Quarter Review of Monetary Policy 2010-11 released on 2^nd November, 2001, indicated that the next phase of Cheque Truncation System, will be rolled out by March 2011 in Chennai.

The Chennai CTS will be Grid Based covering the clearing houses in the other cities of Tamil Nadu and the adjoining states of Kerala and Karnataka. Not sure, why Andhra Pradesh has been left out.

In this connection, NPCI has released the FAQ’s.

The FAQ’s can be accessed at http://www.npci.org.in/documents/CTS-Chennai.pdf

The highlights are: -

01)It will be grid based

02)RBI will manage the Chennai Banker’s Clearing House (CBCH)

03)NPCI will act as a Cheque Processing Centre (CPC). NPCI  will process electronic cheques and images received from member banks.

04)There can be four types of participants in CBCH viz: -

i. Member banks of the CBCH

ii. Sub Member banks who will participate through members

iii. Indirect members who can participate for submission of data and images through a Member bank but will maintain a separate settlement account.

iv. Banks not present in CBCH but having presence in other cities when Grid is introduced (to be finalized in consultation with RBI). They can participate through sub membership or indirect membership route.

5. There will be common disaster recovery (DR) arrangements for both New Delhi and Chennai CTS operations.

Cheque Truncation System – 2010 – (CTS 2010) Guidance Note by National Payments Corporation of India (NPCI)

Cheque Truncation System – 2010 – (CTS 2010) Guidance Note by National Payments Corporation of India (NPCI)

As the deadline for CTS-2010, is coming closer, the various stake-holders are getting their act together

As per RBI Notification No RBI/2009-10/323/DPSS.CO.CHD.No.1832/04.07.05/2009-10  dt.February 22, 2010, IBA(Indian Banks Association) and NPCI, are the coordinating agencies, for CTS - 2010.

Towards this end, NPCI has on 21^st September, 2010 issued a Guidance Note for the roll-out.

The complete Guidance Note can be accessed at

http://www.npci.org.in/CTCircular.aspx

The highlights of the Guidance Note are :

Orders placed by Banks for Cheque Forms, on or after 01/10/2010, must  comply with CTS – 2010 Security features

The Security features contain Mandatory features as well as Optional features

The Mandatory Security features are : -

A) Water Mark (to be incorporated at the paper manufacturing stage)

B) Void Pantograph ( at printing stage)

C)Ultra-violet logo of Bank(at printing stage)

D) Standardized field placements of a cheque

E) Cheque printing colours and background.

F) Microlettering.

G) New Rupee Symbol at CAR (Courtesy Amount Recognition) amount in figure field.

H) Printer Name along with CTS – 2010

Optional Features:-  These are optional features based on the Banks risk perception.

(i) Supplementary watermark containing their own logo  - - - A watermark is a recognizable image or pattern in paper that appears as various shades of lightness/darkness when viewed by transmitted light (or when viewed by reflected light, atop a dark background), caused by thickness or density variations in the paper

(ii) Embedded fluorescent fibres, - - - Invisible colored fluorescent fibres are embedded into the paper during the manufacturing process. The fibres are invisible to the naked eye, but become visible when viewed under an ultra violet lamp. This can be placed at random locations or at pre-determined locations on the Cheque forms.

(iii) fugitive ink, - - - Water fugitive ink is sensitive with most liquid solutions and will smear and stain the document.  Most official stamps uses water fugitive inks (McGraw-Hill, 2007).  This security feature makes it apparent if a document has been altered.

(iv) secondary fluorescent ink, - - - Fluorescent inks are naturally bright inks that reflect and emit light making use of UV light waves, which other inks cannot take advantage of.

(v) Toner fusing - - - Toner Fuse Technology causes Laser Toner to bond permanently to the paper surface. This covert security feature makes it impossible to "lift" words and numbers off the surface of the paper using adhesive tape, without destroying the paper surface.

(vi) check- sum.

(vii) Patterns

(vii) Floral designs

(ix) bleeding ink, - - - An option of bleeding ink could be implemented on a cheque which makes fraud impossible using any water based chemicals, if applied to the cheque a colored solvent reacts and spoils the cheque.  

(x) Structural magnetic security thread

(xii) Hot stamped holograms on multi-city cheques and demand drafts

(xiii) auto-detection tools

(xiv) Use of UV band on sensitive and  key areas of interest on a cheque such as Legal Amount Recognition (Amount in Words), Courtesy Amount Recognition (Amount in Figures), Signature, Beneficiary Name

(xv) pre-encoding of amount field on the MICR band for demand drafts / pay orders (above a self-decided cut-off) before issue to customers

(xvi) Use of check-sum on the face of demand drafts / pay orders (other than the MICR band), etc.

NPCI has advised banks that the additional security features adhere to CTS – 2010 specifications and also not Image heavy.

The deadline for implementation of the CTS 2010 standards is 31/12/2010.

-------------------------------------------------------------------------------------

          One of the interesting aspect of this Guidance Note is that the CTS 2010 Specifications are applicable to all Cheque forms, and not only for Cheques forms for branches under the CTS (Cheque Truncation System) locations.

This might be to ensure that the Speed Clearing process does not get de-railed and also to ensure uniformity amongst the Cheque forms, in our country.

As the INR symbol has been adopted, this also is finding place on the new Cheque Forms.

I guess the next Guidance note will be on the transition period for existing Cheque Forms, already in the financial system. As it is, still Non-MICR cheques are being issued by few Government Departments.

------------------------------------------------------------

Another fascinating facet of this Guidance Note, is that the testing fee of Rs1000/- per Cheque Form Batch is to be remitted by Payorder/Demand Draft, and through NEFT.

Yes, I would have preferred the testing fees through NEFT rather than Pay Order/Demand Draft.

‘Prohibiting alterations / corrections on cheques ' - Clarifications

 Prohibiting alterations / corrections on cheques ' - Clarifications

Reserve Bank of India, on 22^nd June 2010, issued a clarification regarding ‘prohibiting alterations / corrections on cheques'.

This must have caused disappointment in among many!!

The Circular can be viewed at  http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=5741&Mode=0

The above circular is in response to it’s original circular dt.22/02/2010

@ http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=5509&Mode=0

The whole issue is a classic example of mis-communication. The intention of RBI was to convey the proposed changes under the Cheque Truncation Scenario, when the cheques will be processed on Scanned Images.

Nowhere in the Original circular, did Reserve Bank of India, mention that the proposed enhancements would be effective from 01/07/2010.

A top official of a leading bank was quoted in the media, stating that the new rules would be effective from 01/07/2010, and this was picked up by all.

Newspaper articles, blogs, internet sites, discussion forums were all excited by this notification of ‘prohibiting alterations / corrections on cheques'.

It  is nice that RBI promptly issued a clarification.

This Clarification is very clear and also lays down the road-map,

0101)   That the "prohibiting alterations / corrections on cheques'", is applicable for CTS Locations.

02)That it is the Collecting Banker’s responsibility to ensure, ab initio, that such cheques are not accepted for presentment in CTS.

03) That this is not applicable to cheques cleared under other clearing arrangements such as

 -- MICR clearing,

 -- non-MICR clearing,

 -- over the counter collection (for cash payment)

 -- or direct collection of cheques outside the Clearing House arrangement .

04)That this prescription will be effective from 01/12/2010.  Now all the stake-holders have a definite deadline to adhere too.

05) That with regard to other aspects contained in the RBI  circular dt.22/02/2010, separate communication will follow from Indian Banks' Association / National Payments Corporation of India.

Handling of Cheque Returns under Cheque Truncation Process - CTS

Handling of Cheque Returns under Cheque Truncation Process - CTS

In simple terms, Cheque Truncation System, is ”Once deposited, the cheque is scanned and its electronic image transmitted through the entire clearing cycle, instead of the physical cheque itself.

The physical cheques are retained with the collecting bank, instead of the paying bank.

The basic doubt that arises amongst the common man, is what happens when a Cheque is dishonored under CTS?

Hence in ideal conditions, once the Cheque is dishonored under CTS, an Image Return Document (IRD) is generated and sent to the payee.

In many countries, where the CTS has been fully implemented, this IRD is a legal substitute for the dishonored cheque.

However, in our country CTS is still only functional in Delhi (NCR). Hence, an IRD will not solve the purpose. Further, if IRD are issued in the present scenario, there will be chaos at the Banks customer’s centers and branches

To overcome this issue, a-via medium was found out, which was implemented in our country.

In Delhi (NCR), once the cheque is dishonored, under CTS, the collection bank, removes the physical cheque from its possession and hands over to the customer along with the cheque return memo.

As it is, now also the Returned/dishonored cheques are returned to the collection banker by the paying banker, for onward transmission to the customer.

Hence, the end process to the customer remains the same, irrespective of whether the cheque is transmitted physically or through CTS.

For the IRD to be acceptable in our country, it will take a very long time, may be two decades or so.

Cheque Truncation System – Infinet Membership

Cheque Truncation System – Infinet Membership.

Why is INFINET membership required for Banks to be part of CTS Grid?

• One of the important security measures in CTS is the Digital Signature of the Presenting Bank.  
• IDRBT is the certifying authority for banks & financial institutions in India, hence the Banks have to be a member of INFINET. 
• The security, integrity, non-repudiation and authenticity of the data and image transmitted from the paying bank to payee bank will be ensured using the Public Key Infrastructure (PKI).
• The CTS is compliant to the requirement of the IT Act, 2000. It has
• been made mandatory for the presenting bank to sign the image & data from the point of  origin itself. The image and data are secured using the PKI through out the entire cycle covering capture system, the presenting bank, the clearing house and the drawee bank.

The PKI standards used are in accordance with the appropriate Indian acts and practices of IDRBT which is the certifying authority for banks & financial institutions in India.

The standards defined for the PKI are as followed:

1. hash algorithm SHA-1
2. padding algorithm pkcs#1
3. asymmetric encryption with 1024 bit key length
4. Triple DES (3DES, TDES) symmetric encryption with 168 bit key length Certificates in x.509v3 format

What are the image specifications in the CTS?

• Imaging of cheques can be based on various technology options. The cheque images
• can be black and white, Grey Scale or coloured. Black and White images do not reveal all the subtle features that are there in the cheques. Coloured Images increase storage and network bandwidth requirements.
• So it was decided that the electronic images of  truncated cheques will be in gray scale technology.
• There will be three images of the cheques i.e. front grey, front black & white and back black & white which will be made available to member banks.
•  
• The image specifications are:

Image Type Minimum DPI Format Compression

Front GrayScale 100 DPI JFIF JPEG

Front Black & White 200 DPI TIFF CCITT G4

Reverse Black & White 200 DPI TIFF CCITT G4

The image quality of the Grey Scale image shall be 8 bits/pixel (256 levels).

What is a gray-scale image?

• Scanners also function like photo-copiers by reflecting the light passed through narrow passage on to the document.
• Tiny sensors measure the reflection from each point along the strip of light. Reflectance measurements of each dot is called pixel.
• Images are classified as black and white, gray-scale or colors based on the pixels are converted into digital values. For getting a gray scale image the pixels are mapped onto a range of gray shades between black and white. The entire image of the original document gets mapped as some shade of gray, lighter or darker, depending on the color of the source.
In the case of black and white images, such mapping is made only to two colours based on the range of values of contrasts. A black and white image is also called a binary image.

How the quality of the images will be ensured?

• As the payments will be made on the basis of the images, it is essential to ensure the quality of the images. For that purpose the solution proposes Image Quality Audit (IQA) at different level.
• RBI specifies the image standards to the member banks.
• The presenting bank is required to perform the quality audit during the capture itself. Further quality audit will be done at the gateway before onward transmission to clearing house.
• Further the drawee bank can ask for the physical instrument if it is not satisfied that the image quality is not good enough for payment processing.

What is is INFINET

The INdian  FInancial NETwork [INFINET] is the communication backbone for the Indian Banking and Financial Sector. All Banks, Public Sector, Private Sector, Cooperative, etc., and the premier Financial Institutions in the country are eligible to become members of the INFINET. 

The INFINET is a Closed User Group [CUG] Network for the exclusive use of member banks and financial institutions.

INFINET is maintained by IDBRT-Institute for Development and Research in Banking Technology.

Cheque Truncation System -- An Introduction

 

Cheque Truncation System -- An Introduction

Like them or Dislike them, Cheques in India, continue to play an important role in the Payment Systems.

Though the retail as well as corporate customers are slowing moving towards electronic payments modes (RTGS/NEFT/ECR/ATM/CARDS), there is still demand for paper Cheques.

Paper Cheques are widely preferred in the following Payment Needs: ---

01) Telephone/Electricity/Water Bills

02) Credit Card Payments.

03)  Local Government Taxes.

04)  Post dated commitments.

Etc

Hence, Reserve Bank of India, Department of Payments and Settlement Systems has launched various initiatives to make cheques: -

01) Safer 02) User-friendly 03) Faster

Toward this end, the Cheque Truncation System  was sought to be intoruced in our country.

What is Cheque Truncation System?

• Truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch.

• The physical instrument will be truncated at some point en-route to the drawee branch and an electronic image of the cheque would be sent to the drawee branch along with the relevant information like the MICR fields, date of Presentation, presenting banks etc.

• Thus with the implementation of cheque truncation, the need to move the physical instruments across branches would not be required, except in exceptional circumstances.

• This would effectively reduce the time required for payment of cheques, the associated cost of transit and delay in processing, etc., thus speeding up the process of collection or realization of the cheques.

Why Cheque Truncation in India?

Cheque Truncation

i.                    speeds up collection of cheques and

ii.                 therefore enhances customer service,

iii.               reduces the scope for clearing related frauds,

iv.                minimizes cost of collection of cheques,

v.                  reduces reconciliation problems,

vi.                Eliminates logistics problems etc.

With the other major product offering in the form of RTGS, the Reserve Bank created the capability to enable inter-bank payments online real time and facilitate corporate customer payments.

The other product, National Electronic Funds Transfer, is an electronic credit transfer system. However, to wish away cheques is simply not possible and that is the reason why the Reserve Bank of India,  decided to focus on improving the efficiency of the Cheque Clearing Cycle. Cheque Truncation is the alternative.

Moreover contrary to perceptions, Cheque Truncation is a more secure system than the current exchange of physical documents in which the cheque moves from one point to another, thus, not only creating delays but inconvenience to the customer in case the instrument is lost in transit or manipulated during the clearing cycle.

How the uniqueness of the cheque would be imparted to the image?

• The images captured at the presenting bank level would be transmitted to the Clearing House and then to the drawee branches with digital signatures of the presenting bank.
• Thus each image would carry the digital signature, apart from the physical endorsement of the presenting bank, in a prescribed manner.
• In order to ensure only images of requisite quality reach the drawee branches, there will be a quality check process at the level of the Capture Systems and the Clearing House Interface. This would ensure only images of requisite quality secured with the digital signatures of the presenting banks reach the drawee branches.

Who can participate in the Cheque truncation system?

• The criteria for banks participating in the Cheque truncation system are:
• Membership of the clearing house in the NCR. ( As CTS is still live only in NCR – New Delhi.
• Membership of the Indian Financial Network (INFINET)

How the non-INFINET member banks can participate in the CTS?

• In respect of banks who are not members of the INFINET, the following alternatives are available.
• They may become the sub-members of the direct members or such banks may use the infrastructure of the other banks having INFINET membership without being the INFINET members themselves and there clearing settlement can be done either directly or through the member through whom they are participating.

Thus the benefits could be summarized as:

a) Faster clearing cycle;

b) Better reconciliation/verification process

c) Better Customer Service Enhanced Customer Window

d) T+0 for Local Clearing and T + 1 for inter-city clearing.

e) Elimination of Float Incentive to shift to Credit Push payments.

f) The jurisdiction of Clearing House can be extended to the entire country. No Geographical Dependence

g) Operational Efficiency will benefit the bottom lines of banks Local  Clearing activity is a high cost no revenue activity.

h) Minimises Transaction Costs.

i) Reduces operational risk by securing the transmission route.

Cheque Truncation System(CTS) in India, was launched as a Pilot in NCR-New Delhi, in February 2008.

After the initial hiccups associated with CTS were staiblised, MICR clearing was abolished in NCR-New Delhi w.e.f 01/07/2009, and at present only CTS is functioning in NCR-New Delhi.

The next step for Cheque Truncation System (CTS) is Chennai.

However, before CTS is introduced in Chennai, Reserve Bank of India, DPSS has laid down the Road Map for CTS – 2010 i.e Standardization (Consistency, Equality) and Enhancement (Enrichment) of Security Features in Cheque Forms.

My Blog Post on the same can be accessed @ http://prashantnepayments.blogspot.com/2010/02/standardisation-consistency-equality.html